As it turned out, spot prices averaged $US155 a tonne in 2021. Consensus expectations for 2022 are $US90 a tonne versus the December 31, 2021, spot price of $US120.75 a tonne, and Mr Cleary said the market’s expectations for 2022 were probably too pessimistic again.
Supply and demand
Others expect increased supply to dampen any post-pandemic rebound in Chinese demand. Morningstar forecasts iron ore prices to average $US116 a tonne from 2021 to 2024 inclusive.
“In the short term, the price can swing around – it’s been a volatile year,” said Mathew Hodge, Morningstar’s director of equity research.
“The constraints around power in China appear to be easing from their height a few months ago. Monetary policy has also loosened, which could provide an important signal for downstream steel producers that the government and central bank will support the economy and demand will improve.”
However, Mr Hodge warned 2022 could see supply increases from Australia and Brazil as Chinese demand flattens.
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“Iron Bridge is likely to start late 2022 for Fortescue, I expect modest incremental gains from BHP and Rio Tinto, and a further recovery from Vale in Brazil,” he said.
“I expect carbon to be a constraint on steel production growth and hence iron ore demand. It will also be interesting to see if there’s a fundamental change in the way the economy allocates resources post the China Evergrande debacle.
“It’s possible the demise could signal the end of growth in floor space construction in China, which is an important consumer of steel, and this would be consistent with the slowing rate of migration to cities, given most of China’s population is already urbanised.”
Mr Hodge said any blow from lower iron ore prices in 2022 for BHP and Rio was likely to be offset by stronger copper prices, with BHP also benefiting from higher metallurgical coal prices. He also cautioned Fortescue was exposed to growing price discounts on the lower-grade iron ore it produces.
According to Mr Cleary, Fortescue’s five-year bull run can extend well into the future for investors.
“Fortescue is the pure-play iron ore exposure and comes with the added benefit of a green hydrogen call option that you are getting for free at current levels,” he said.
“Fortescue is well ahead of peers in terms of hydrogen and ammonia production, and this could be worth $50 a share or more if they execute.”
